Interim Management Report at September 30, 2017
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INTERIM MANAGEMENT REPORT AT SEPTEMBER 30, 2017 On July 27, 2017, the Board of Directors of TIM S.p.A. acknowledged the start of the direction and coordination by Vivendi S.A.. On September 13, 2017, Consob communicated that “it considered that Vivendi exercises de facto control over TIM pursuant to Article 2359 of the Italian Civil Code and pursuant to Article 93 of the Consolidated Law on Finance, as well as the related party rules”. The Interim Management Report has therefore been prepared in accordance with the relevant provisions, indicating Vivendi S.A. as the “Controlling Entity” and TIM S.p.A. as the company subject to direction and coordination. This document has been translated into English for the convenience of the readers. In the event of discrepancy, the Italian language version prevails. CONTENTS INTERIM MANAGEMENT REPORT AT SEPTEMBER 30, 2017 The TIM Group _____________________________________________________________________ 4 Highlights — First Nine Months of 2017 _________________________________________________ 6 Consolidated Operating Performance ___________________________________________________ 8 Consolidated Operating Performance for the Third Quarter of 2017 _________________________ 14 Financial and Operating Highlights of the Business Units of the TIM Group ____________________ 16 Consolidated Financial Position and Cash Flows Performance ______________________________ 26 Consolidated Financial Statements – TIM Group _________________________________________ 34 Events Subsequent to September 30, 2017 ____________________________________________ 43 Business Outlook for the Year 2017 ___________________________________________________ 43 Main risks and uncertainties _________________________________________________________ 44 Main changes in the regulatory framework ______________________________________________ 48 Corporate Boards at September 30, 2017 ______________________________________________ 52 Macro-Organization Chart at September 30, 2017 _______________________________________ 54 Information for Investors ____________________________________________________________ 55 Related party transactions and direction and coordination _________________________________ 57 Significant non-recurring events and transactions ________________________________________ 58 Positions or transactions resulting from atypical and/or unusual operations __________________ 58 Alternative Performance Measures ____________________________________________________ 59 TIM GROUP CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 2017 _________________________________________ 61 Contents _________________________________________________________________________ 62 Consolidated Statements of Financial Position __________________________________________ 63 Separate Consolidated Income Statements _____________________________________________ 65 Consolidated Statements of Comprehensive Income _____________________________________ 66 Consolidated Statements of Changes in Equity __________________________________________ 67 Consolidated Statements of Cash Flows________________________________________________ 68 Notes to the Condensed Consolidated Financial Statements _______________________________ 70 Declaration by the Manager Responsible for Preparing the Corporate Financial Reports _________________________________________________________________________ 110 THE TIM GROUP THE BUSINESS UNITS DOMESTIC The Domestic Business Unit operates as the consolidated CORE DOMESTIC market leader in the sphere of voice and data services on fixed • Consumer and mobile networks for final retail customers and other • Business wholesale operators. • Wholesale • Other (INWIT S.p.A. and support In the international field, the Business Unit develops fiber optic structures) networks for wholesale customers (in Europe, in the Mediterranean and in South America). INTERNATIONAL WHOLESALE Olivetti, which is now part of the Business segment of Core Telecom Italia Sparkle Group Domestic, operates in the area of office products and services Telecom Italia Sparkle S.p.A. for Information Technology. • South American subsidiaries • North American subsidiaries • European subsidiaries INWIT S.p.A. operates in the electronic communications • infrastructure sector, specifically relating to infrastructure for housing radio transmission equipment for mobile telephone networks, both for TIM and other operators. BRAZIL The Brazil Business Unit (Tim Brasil group) provides mobile Tim Brasil Serviços e Participações S.A. telephone services using UMTS, GSM and LTE technologies. Tim Participações S.A. Moreover, with the acquisitions and subsequent integrations • – TIM S.A. (formerly Intelig Telecom. Ltda) into the group of Intelig Telecomunicações (now TIM S.A.), Tim – Tim Celular S.A. Fiber RJ and Tim Fiber SP, the services portfolio has been extended by offering fiber optic data transmission using full IP technology such as DWDM and MPLS and by offering residential broadband services. Interim Management Report at The TIM Group 4 September 30, 2017 BOARD OF DIRECTORS Chairman Arnaud Roy de Puyfontaine Deputy Chairman Giuseppe Recchi Chief Executive Officer and Amos Genish General Manager Directors Camilla Antonini (independent) Franco Bernabè (independent) Ferruccio Borsani (independent) Lucia Calvosa (independent) Francesca Cornelli (independent) Frédéric Crépin Dario Frigerio (independent) Félicité Herzog (independent) Anna Jones (independent) Marella Moretti (independent) Hervé Philippe Danilo Vivarelli (independent) Secretary to the Board Agostino Nuzzolo BOARD OF STATUTORY AUDITORS Chairman Roberto Capone Acting Auditors Vincenzo Cariello Gabriella Chersicla Gianluca Ponzellini Ugo Rock Alternate Auditors Francesco Di Carlo Piera Vitali Riccardo Schioppo Interim Management Report at Board of Directors and Board of Statutory Auditors 5 September 30, 2017 of TIM S.p.A. HIGHLIGHTS — FIRST NINE MONTHS OF 2017 In terms of economic and financial performance for the first nine months of 2017: • Consolidated revenues amounted to 14.7 billion euros, up 5.3% on the first nine months of 2016 (+2.7% in organic terms). The figure for the third quarter of 2017 was up 1.3% (+1.8% in organic terms). • EBITDA amounted to 6.2 billion euros, up 5.7% on the first nine months of 2016 (+3.8% in organic terms). The organic EBITDA margin stood at 42.3%, up 0.4 percentage points on the first nine months of 2016. EBITDA for the first nine months of 2017 was pulled lower by a total of 222 million euros in non-recurring expenses (155 million euros in the first nine months of 2016, at constant exchange rates), without which the organic change in EBITDA would have been +4.8%, with an EBITDA margin of 43.8%, up 0.8 percentage points compared to the first nine months of 2016. EBITDA for the third quarter of 2017 amounted to 2 billion euros, down 2.5% on the third quarter of 2016. In organic terms, and without the impact of the above-mentioned non-recurring expenses, the change would have been an increase of 0.7%. • Operating profit (EBIT) came to 2.8 billion euros, up 2.4% on the first nine months of 2016 (+1.5% in organic terms), pulled down by non-recurring net expenses of 252 million euros (144 million euros in the first nine months of 2016, at constant exchange rates), without which the organic change in EBIT would have been +5.1%. EBIT for the third quarter of 2017 amounted to around 1 billion euros, down 10.9% on the third quarter of 2016. In organic terms and without non-recurring net expenses, the decrease from the third quarter of 2016 would have been -2.1%. • The Profit for the period attributable to Owners of the Parent amounted to 1 billion euros (1.5 billion euros in the first nine months of 2016). On a like-for-like basis – i.e. without including the impact of non-recurring net expenses and, in the first nine months of 2016, the positive impact of the fair value measurement of the embedded option in the mandatory convertible bond converted into TIM shares at the end of 2016 – the profit for the first nine months of 2017 would have been almost 100 million euros higher than the figure for the same period of 2016. • Capital expenditures for the first nine months of 2017 amounted to 3,881 million euros (3,107 million euros in the first nine months of 2016) and included the outlay of 630 million euros for the renewal of the user rights for the 900 and 1800 MHz frequencies by the Domestic Business Unit. The Company has continued to implement selective capital expenditure by identifying projects with higher returns, targeted at innovation and transformation, while driving Ultra Broadband coverage, which has led to a 46% increase in the related capital expenditure. • Adjusted net financial debt amounted to 26,228 million euros at September 30, 2017, up 1,109 million euros on December 31, 2016 (25,119 million euros). The increase was essentially due to the payments of 630 million euros made by TIM S.p.A. for the renewal of the user rights for the mobile telephone frequencies and of 257 million euros made by the Brazil Business Unit to the consortium that is carrying out the cleanup of the 700 MHz spectrum, which the Business Unit purchased the user rights to in 2014, as well as the payment of dividends of 219 million euros. The positive performance of business operations ensured full coverage of the requirements resulting from the payment of the income tax expense. Interim Management Report Consolidated Operating Performance 6 at September 30, 2017 Financial highlights (millions